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A major transformation is under way at
Wendy'WEN -2.154398563734291%Wendy's Co.U.S.: NasdaqUSD10.9
-0.24-2.154398563734291%
/Date(1427835600259-0500)/
Volume (Delayed 15m)
:
4234745AFTER HOURSUSD10.9
%
Volume (Delayed 15m)
:
1666484
P/E Ratio
34.0625Market Cap
4095375942.86545
Dividend Yield
2.018348623853211% Rev. per Employee
66059.7More quote details and news »WENinYour ValueYour ChangeShort position
s, the world's third-largest burger chain. The company struggled for years after the death of its famous founder, Dave Thomas, in 2002, but finally looks to be finding its way.

In the past 18 months, Wendy's (ticker: WEN) has gone back to its roots as a high-quality burger maker, introducing new menu items and more focused marketing, and rolling out a dramatic remodeling of its stores. Even a new logo will be unveiled in March.

Wendy's has been revamping its menu, marketing, and stores. Improved results could boost its shares by 40%. Above, a restaurant in Columbus, Ohio.
Jay LaPrete/Bloomberg News

The results are notable, with same-store sales rising for six of the past seven quarters. They were up 4.9% in the past two years.

Investors have bid up Wendy's shares by 20% from an October low, but a recent price of $5.03 puts the stock right back where it traded around the start of the year. Don't expect it to stay there, however, as the company begins to churn out appetizing results.

At 10 times 2014 estimated Ebitda, Wendy's would be worth $7.20. The stock yields 3.2%.

Founded 44 years ago by Thomas, Columbus, Ohio-based Wendy's has 6,560 stores, with 78% franchised and the rest company-owned. Almost 90% of the stores are in the U.S., with the greatest concentrations in Florida, Ohio, Texas, and Georgia.

In 2008, Wendy's was acquired for $2.4 billion by Triarc, a holding company controlled by activist investor Nelson Peltz. He merged it with Arby's and renamed it Wendy's/Arby's. Arby's was sold to a private-equity group in 2011, enabling management to focus on Wendy's.

Wendy's earned $64 million, or 16 cents a share, last year, on revenue of $2.5 billion. This year analysts expect earnings to rise to 18 cents, on a 4% rise in sales.

WENDY'S HAS MADE significant changes to its menu and marketing plan. Dubbed "A Cut Above," the latter emphasizes the brand's high-quality burgers and fresh ingredients. Since introducing its Dave's Hot 'N Juicy cheeseburgers in September 2011, the company has followed up with a slew of new premium products, including the Bacon Portabella Melt, Mozzarella Chicken Supreme, Spicy Guacamole Chicken Club, and the Berry Almond Chicken Salad.

The new products have met with success, and Wendy's has gained share in large hamburgers and large chicken sandwiches. But some price-conscious customers have taken their business elsewhere. Management recently launched a value-based menu, called "Right Price Right Size," and will ramp up marketing of it this year. Management couldn't be reached for comment.

Remodeling Wendy's aging stores is another part of its strategy. While the company has updated some stores over the years, the latest efforts involve an all-encompassing overhaul aimed at creating a cutting-edge design that rivals competitors'. The remodels include such features as lounge seating, fireplaces, flat-screen TVs, Wi-Fi, and digital menu boards.

Wendy's has launched 66 new restaurants, of which 48 have been remodels, and they have met with a positive response from customers. Sales in the newer-looking stores are up 25% since remodeling. The company plans to remodel 200 stores this year, and open 120 new units. In 2015 it is targeting 1,300 new and remodeled outposts.

The changes are showing up in profitability and sales. In the December quarter, company-run restaurants enjoyed profit margins of 15.9%, compared with 15% a year ago, and that's despite rising costs for beef and chicken. This year management expects even better performance, with same-store sales rising 2% to 3%.

Wendy's has a solid balance sheet, giving it ample flexibility to execute its strategy. Cash stands at $454 million to debt of $1.46 billion, making net debt 29% of total capitalization. The company also generates free cash flow, with $15 million expected in 2013.

Through his firm, Trian Fund Management, Peltz and associates control 27% of Wendy's stock. Peltz, who has been a director of the company since 1993, currently serves as chairman, and has long made his view known that Wendy's is worth far more than its stock-market value.

Given his involvement, a sale of the business is a strong possibility. One logical buyer: Yum! Brands, which doesn't own a burger business.

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Wendy's trades at a discount to peers, but the gap is expected to narrow.